How does Zero Interest Credit Card EMIs Work?

Updated on: 15 Jan 2024 // 5 min read // Credit Cards
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Go and check for any loan, and you will find that they all come with an interest cost attached. For long term loans like home loans and mortgages, the interest rate is floating and tends to vary on a defined time period, generally every quarter. As opposed to this, Unsecured Loans are provided with a fixed interest rate obligation, which is calculated on a reducing principal amount. The overall cost, however, is much higher than any of the other secured loans.

There is, however, one thing which stands out as an oddity. A number of times Credit Card Companies come with EMI schemes on which the claim can be made at zero interest. In almost all cases, you are actually paying the interest component, only that it is not named as such. Here is how it works.

Merchant is paying the interest component:

Take a look at the many online shopping portals, that claim to offer zero-interest EMI. In the majority of cases, their process is that they will add an extra discount to the product price, and your card is charged at a lesser price. The bank converts this to routine EMI with interest. You will see these schemes on both Amazon India and Flipkart. These schemes are available during “Sale times” and you can choose this on SBI Credit Card or HDFC Credit Card or any other card running the scheme in promotion. The thing is, you do end up paying the advertised price for the product as claimed by the merchant.

The amount of discount offered by your merchant may actually not be equal to the amount the bank will charge. In many cases, the bank will charge a higher interest rate. You will be bearing the difference in interest rates. There is also another point, you have to pay GST on all EMIs. The merchant does not cover the GST charged on each EMI when they give you the interest discount, so that also goes from your own pocket.

How to Convert Your SBI Credit Card Payment to EMI?

Increased MDR to spread earnings:

Credit Cards are meant for retail purchases. Every time you purchase something, the bank which issues the card will charge the merchant an MDR or a Merchant Discount Rate. This is the fees through which the Credit Card Company earns money on every transaction. If you are smart you must have never carried a balance on your Credit Card. You may never have paid any interest on your card, but the bank has still been earning its fair share. This is MDR. In a number of cases, especially with big online retailers and even offline big box and chain stores, the Credit Card companies start charging a bit extra on their predefined MDR in order to account for missing EMI interest.

Consider this like a case of reverse salami slicing. Instead of charging the interest amount of one customer to their own EMIs, the bank will recover the cost by charging a bit extra to all transactions done on the retailer POS. The merchant will pass down this cost to customers in the long run. Since not everyone who will charge their card, will convert their transaction to EMI, but everyone is being charged extra, it actually ends up good for you if you do convert to EMI but bad if you pay in full at the end of your Credit Card billing period.

Extremely high processing or administration fees:

Every once in a while, you would come across some Credit Card running a scheme asking you to convert any kind of transaction to EMI at a zero percent interest rate. If you do come across any such scheme, always try to read the detailed terms and conditions. In a normal loan or Credit Card EMI, you will be charged around 1 to 2 % of the principal as the processing fee. In fact, many secured loans charge as low as 0.5% or even lower as processing or administration fee.

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